Where Do Your Social Security and Medicare Taxes Go?
FICA Taxes Fund Retirement and Medical Benefits for Retirees
Most W-2 employees' pay stubs itemize the taxes and deductions that are taken from their gross pay. You'll almost certainly see two items among these deductions in addition to federal and state or local income taxes: Social Security and Medicare taxes.
These taxes are part of the Federal Insurance Contributions Act (FICA) tax, a group of payroll taxes collected from both the employer and the employee. An Additional Medicare Tax can be deducted as well. After federal and state income taxes, Social Security and Medicare or FICA taxes make up the bulk of taxes that are routinely withheld from your paychecks.
How FICA Taxes are Paid
You, the employee, pay half of the tax—which is what you see deducted on your pay stub. Your employer must match these amounts and pay their half to the government separately at regular intervals.
Independent contractors don't have FICA taxes—or income taxes—withheld from payments made to them, but they must nonetheless pay them. They must pay both halves of Social Security and Medicare as the self-employment tax.
Where Social Security Taxes Go
The bulk of the FICA tax revenue goes towards funding the United States government's Social Security trusts. These trusts are legally "earmarked" or solely designated to fund the programs administered by the Social Security Administration, including:
- Retirement benefits
- Survivor benefits
- Disability benefits
The Social Security tax revenue that's collected from wage earners and employers is placed into these trusts, which in turn fund the monthly benefits to these individuals:
- Retirees and their spouses who have qualified for Social Security (retirement benefits)
- Surviving spouses and minor children of workers who have died (survivor benefits)
- Disabled workers (disability benefits)
Costs associated with administering the plan also come directly from these trusts, but they're minimal: less than one cent out of every dollar collected pays for administrative costs, according to the Social Security Administration.
The taxes collected can exceed the cost of current benefits. The money is put in the trusts and invested to pay for future program benefits when this occurs.
Investments made from the funds placed inside these trusts allow the United States government to essentially borrow against the surplus to fund other parts of the government. This practice has many worried about the longevity of these Social Security programs, but the government has repaid its loans from the Social Security trusts with interest so far.
Where Medicare Taxes Go
The remainder of FICA tax money collected from your paycheck goes to the Medicare program, which is the federal program that funds health care costs for older and disadvantaged Americans.
Unlike Social Security, Medicare is also financed through premiums and from the government's general revenue, so it's not wholly dependent on the collection of FICA payroll taxes.
The Medicare taxes collected from current wage earners and their employers are used to pay for hospital and medical care costs incurred by current Medicare beneficiaries. Any excess tax revenue is accounted for in a designated Medicare trust fund.
The Additional Medicare Tax
The Additional Hospital Insurance Tax, more commonly referred to as the Additional Medicare Tax (AMT), became effective on November 29, 2013 as provided for by the Affordable Care Act (ACA).
The purpose of this tax is to fund the provisions of the ACA, as well as the Premium Tax Credit that went into effect under the ACA, and it was implemented with the express purpose of doing so. It works out to a rate of 0.9%, and employers do not have to match it, but it's not applicable to all taxpayers.
Only those with incomes that exceed $200,000 annually are subject to this tax as of 2020. Married taxpayers who file joint returns can earn up to $250,000 before the AMT kicks in, but those who file separate married returns reach the AMT threshold on earnings of just $125,000.
Note: Tax laws change periodically. You should always consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.
Social Security Administration. "Understanding the Benefits." Pages 2-4. Accessed Nov. 10, 2020.
Tax Policy Center. "Are the Social Security Trust Funds Real?" Accessed Nov. 10, 2020.
U.S. Centers for Medicare & Medicaid Services. "How Is Medicare Funded?" Accessed Nov. 10, 2020.
Federal Register. "Rules Relating to Additional Medicare Tax." Accessed Nov. 9, 2020.
IRS. "Topic No. 560 Additional Medicare Tax." Accessed Nov. 9, 2020.